This week I was chatting with my colleague, Zoe Tibbles, who has a specialisation in the extension of residential leases. We were discussing the timing of the lessee’s request for an extension of its lease as this can substantially affect the premium payable.
Although a long residential lease decreases in value year by year, it does not normally worry the leaseholder. What is the difference in a lease which, say, has 199 years left to run and one with 198 years? Very little. However, if a lease gets to a point where there is, say, only 95 years left to run then its value can be substantially reduced. That is because many potential purchasers view askance a term that may run out in their lifetimes. Added to that is the reluctance of many mortgage providers to lend where the lease has 80 years or fewer left to run. To cover this problem there is legislation (The Leasehold Reform Housing and Urban Development Act 1993) which provides that most lessees of flats let on a long lease at a low rent can apply to extend their leases.
There is, of course, a cost for this which has to be paid to the freeholder. What the freeholder is entitled to receive is the loss of value of its interest in the property. Not surprisingly, the closer to the expiry of the original term the request is made the more that has to be paid to the freeholder. Some examples are set out below.
Assume a lease with a value of £200,000 and a ground rent of £150.
With 199 years left to run, the freeholder is likely to receive £3,000.
With 80 years left to run, the freeholder is likely to receive £7,000 to £8,000.
With 70 years left to run, the freeholder is likely to receive £13,000.
With 51 years left to run, the freeholder is likely to receive £33,000.
The examples are not exact because the actual figure will be influenced by location and whether the ground rent payable increases.
The break point where the amount payable begins substantially to increase exponentially is where there is only 80 years left to run. That is because the freeholder is then entitled to add to the amount payable ‘marriage value’. The amount actually payable is usually agreed by the parties relying on the formula provided by the legislation. If the negotiated route does not work the Leasehold Reform Housing and Urban Development Act 1993 provides a framework as to how the figure is decided. Ultimately, if the parties cannot agree the figure is as decided by the First Tier Property Tribunal.
A note of caution is that the right to extend the lease does not apply to all residential property and there are various technical steps that need to be followed. You do need the advice of qualified professionals – being valuers and solicitors such as Zoe.
If you want more information then please contact Zoe either on the telephone on 01793 848900 or by email: firstname.lastname@example.org